Q4 2023 Ranger Energy Services Inc Earnings Call

Participants

Stuart Bodden; President, Chief Executive Officer; Ranger Energy Services LLC

Mellisa Cougle; Chief Financial Officer; Ranger Energy Services LLC

Luke Lemoine; Analyst; Piper Sandler

Don Crist; Analyst; Johnson Rice & Company L.L.C.

Derek Podhaizer; Analyst; Barclays

John Daniel; Analyst; Daniel Energy Partners

William Kim; Analyst; Presidio Asset Management

Presentation

Operator

Thank you and welcome to Ranger Energy Services fourth-quarter and full-year 2023 results conference call. Ranger has issued a press release summarizing operating and financial results for the three and 12 months ended December 31, 2023. This press release, together with accompanying presentation materials, are available in the Investor Relations section of our website at www.rangerenergy.com.
Today's discussion may contain forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements.
Further, please note that our non-GAAP financial measures may be disclosed during this call. A full reconciliation of GAAP to non-GAAP measurements are available in our latest quarterly earnings release and conference call presentation. (Operator Instructions) Please note this event is being recorded.
With that, I would now like to turn the conference call over to Stuart Bodden, Ranger's CEO; and Melissa Cougle, Ranger's CFO, for their prepared remarks.

Stuart Bodden

Thank you, and good morning, everyone. I'm pleased to welcome you to our fourth quarter and full year 2023 earnings call. 2023 was a year of significant milestones and achievements for Inger.
Before we delve into the specifics of our fourth quarter and full year 2023 financial and operational performance, I'd like to take a moment to reflect on the journey we've undertaken the strategic decisions that have shaped our path and a few highlights from the year. In 2023, ranker achieved the highest annual earnings in our company's history, despite facing headwinds stemming from macroeconomic conditions and industry-wide challenges, which resulted in a 20% decline in drilling rig count, which delivered revenue of $636.6 million, marking a 5% increase from the prior year. This growth trajectory was supported by our unwavering commitment to safety, superior service quality and our production cycle focus, which continues to prove resilient to market fluctuations. Notably, our net income surged to $23.8 million or 19 $0.95 per fully diluted share, up from $15.1 million or $0.65 per share in the previous year. Our success in 2023 underscores the strength of our business model and the dedication of our team members throughout the year. We remain steadfast in our commitment to maximizing shareholder value by our four strategic pillars, maximizing cash flow, fortifying our balance sheet, returning capital to our shareholders and exploring growth through acquisitions. And we'll continue to prioritize cash flow generation throughout 2023, leveraging our capital-efficient business model and strong operating leverage. We generated $84.4 million in adjusted EBITDA, reflecting a 6% increase from the prior year. And thanks to consistent price discipline and the pace of activity declines. We achieved free cash flow of $54.3 million or 64% of adjusted EBITDA, converting cash at these levels is a market differentiation for Ranger and resulted in free cash flow per share of approximately $2.30, providing for a more than 20% free cash flow yield per share, at least at recent trading levels. Maintaining a robust balance sheet is essential for navigating the uncertainties and seizing opportunities in our dynamic industry landscape. In the second quarter of 2023, we achieved a significant milestone of effectively becoming debt-free, paying off nearly $80 million since the first quarter of 2022 when our debt peaked at for our 2021 string of acquisitions, we have remained debt-free and ended 2023 with over $85 million in liquidity. We believe that minimal debt is crucial for maximizing shareholder returns and preserving optionality through cycles. And we remain committed to preserving and growing our balance sheet strength with our balance sheet targets in place in the first half of the year, we turned our attention to capital returns for our shareholders. In 2023, we announced the Company's first dividend and repurchase approximately 1.8 million shares and those repurchases have continued into 2024. As of today, we have now repurchased over 10% of Range's outstanding shares. When we discuss acquisitions and strategic opportunities, we are keenly aware, our own stock remains one of the most attractive uses of capital available to us and any M&A must compete against it when we launched our shareholder returns program in the second quarter, we committed to returning at least 25% of annual cash flows to shareholders through dividends and share repurchases. And I'm pleased to report and we far exceeded that commitment in 2023 by returning to 40% of free cash flow back to our shareholders, reaffirming our dedication to creating long-term value, delivering meaningful returns to our shareholders will remain a top priority for Ranger. We also intend to increase range for size and scale. And throughout 2023, we remain actively engaged in evaluating strategic opportunities for growth through acquisitions. Our disciplined approach ensures that any potential transactions are value, creating and accretive for our shareholders would be like to do another transformational corporate transaction.
Absolutely. But we are committed to maximizing value, and we will not overpay as a result of the unfavorable bid-ask spread in 2023, we pivoted to evaluating smaller asset acquisitions that folded into our current operations portfolio. In the third quarter, we successfully closed a modest acquisition of downtown assets and support equipment, further enhancing our operational capabilities. We have the balance sheet and the resources to execute quickly on these types of opportunities and will continue to be nimble in evaluating both large and small deals on behalf of our shareholders, our full year results demonstrated our resilience and growth trajectory.
The fourth quarter did present some unique challenges. We experienced the impact of falling oil prices, customer budget exhaustion and early weather shutdowns. In addition to our typical holiday slowdown Despite these headwinds, our high-specification rigs business demonstrated stability, reflecting its production cycle focus, which is less tied to the ups and downs of U.S. land rig count. Not to mention our ongoing dedication to service quality and strong customer relationships.
Our Wireline segment faced more significant weakness than expected in Q4, driven by frac slowdowns and seasonal factors, particularly in the northern region where our business is strongest.
Finally, our Processing Solutions & Ancillary Services segment increased revenues year over year in most business lines, but adjusted EBITDA declines due to higher operating costs and operational and scheduling inefficiencies that creeps into certain service lines during the year due to the overall market slowdown.
Looking ahead in the near term, the first quarter has started slower than we planned similar to many of our peers. Given macro uncertainties and continued pressure on gas markets, our E&P customers have been cautious with our activity levels to start the year. We have also experienced customer driven shutdowns this quarter related to a safety incident of other service providers that caused stand downs across all service providers.
On the positive side, we are already seeing activity levels pick back up in the back half of February, paving the way for a stronger second quarter.
Regarding full year 2024, we built a budget, assuming slight year-over-year improvement underpinned by relatively stable customer demand. Given the puts and takes I mentioned at the start of the year, we expect demand to be stronger in the second half of the year, and we remain optimistic about our ability to grow our business in the medium and long term. We are encouraged that the wealth of the SaaS space has already shown resilience to weaker activity levels, providing a reliable floor to our business. We also fueled our upsides for the year that are not fully yet realize such as expanded work associated with the key customer agreement we signed in 2023. We think this is a model for future customer relationships and continue to have encouraging conversations with our customers. We continue to be encouraged that our highest quality customers are willing to commit additional operating dollars range. We fully stand behind our ability to convert approximately 60% of our EBITDA to free cash flow, even under flattish conditions and additional diligence and deploying these cash flows in the most accretive way possible for our shareholders. To date, we have spent more than $25 million of our original $35 million of repurchase authorization announced one year ago, which has resulted in the repurchase of over 10% of the company's outstanding shares. Given our belief in the underlying value of our stock and our continued commitment to returning capital in the most efficient way possible. The Board has increased our share repurchase authorization by an additional $50 million, resulting in total share repurchase capacity of $85 million.
Along with all of the notable financial achievements, the entire Ranger team is proud to announce the release of our first ever sustainability report. This report reflects our commitment to operating responsibly and underscores our efforts on environmental, social and governance initiatives. We remain dedicated to fostering a culture of safety and sustainability across all aspects of our operations. As we embark on the new year, Ranger is well positioned for continued strong performance and value creation. Our strategic priorities for 2020 for Syneron driving for growth, the challenging market conditions and targeted acquisitions. We will focus on high quality and safe execution to differentiate ourselves with a relentless commitment to customer satisfaction. All the while remaining fully committed to providing meaningful capital returns to our shareholders. Our acquisition strategy will be complemented by ongoing dividends and share repurchases, reflecting our confidence in the long-term prospects of our business.
In conclusion, I want to express my gratitude to our dedicated team members whose hard work and dedication have been instrumental in our success as we navigate the year ahead, I am confident Reynders ability to deliver sustainable growth and value for our shareholders.
With that, let me turn the call over to Melissa to review our key financial results.

Mellisa Cougle

Good morning, everyone, and thank you for joining us today as we provide an overview of our financial performance for the full year 2023 and the fourth quarter. Specifically, let's start with the summary of our full year 2023 financial results. Overall, we achieved year-over-year growth and made substantial progress across key financial metrics. Our revenue for the full year totaled $636.6 million, marking a 5% increase from $608.5 million in 2022. This growth was primarily driven by our continued focus on service quality, effectively white space in the calendar and operational efficiency despite encountering challenges and customer activity and our full year performance.
Moving onto profitability, our net income for the full year stood at $23.8 million or $0.95 per fully diluted share. This represents a substantial improvement from the previous year's net income of $15.1 million or $0.65 per share. Our ability to deliver higher earnings reflect the effectiveness of our business model and underscores its resilience in the face of declining market conditions. Adjusted EBITDA also bond compared to $79.5 million in the prior year. This 6% increase demonstrates our ability to generate strong operating cash flows and underscores our commitment to maximizing shareholder value. Furthermore, we are incredibly proud to have achieved free cash flow for the year of $54.3 million, representing over 60% of adjusted EBITDA. This robust free cash flow generation reflects our disciplined approach to capital allocation and underscores our financial strength.
Now let's turn to the financial performance for the fourth quarter of 2023. Despite the current headwinds during this period, we remain we maintained our focus on operational excellence and remained agile in responding to market conditions for the fourth quarter our net income totaled $2.1 million, or $0.09 per fully diluted share, while six represents a decrease from the prior year. It's important again to note that our market cap challenges in the fourth quarter, the customer budget exhaustion and a notable holiday slowdown during this period. Despite these challenges, we remained resilient and focused on optimizing our operations, adjusted EBITDA for the fourth quarter was $18.4 million, with the lion's share of the year's free cash flow coming in totaling $29.1 million.
Turning to our balance sheet and liquidity position. I'm pleased to report that lenders balance sheet strength continues to improve, and we ended the year with $85.1 million of liquidity consisting of $59.4 million of capacity on our revolving credit facility and $15.7 million of cash proceeds. This represents a significant improvement from the previous year. Underscoring our commitment to financial discipline and prudent capital management, we will call attention to what we expect will be our typical first quarter decline in cash flow largely due to compensation commitment at the start of every year. Our total debt at the end of December was virtually zero to reflect our commitment to maintaining a high degree of financial flexibility to seize opportunities in the future. Our ability to achieve these results in a challenging operating environment, effectiveness of our strategic initiatives and underscores our commitment to creating long-term value for our shareholders in conclusion, I'd like to reiterate that despite the challenges we faced in 2023 that have continued into 2024. We remain confident in not only the resilience and strength of our business, but also the longevity of the U.S. onshore market, Embraer's ability to provide through-cycle returns backdrop, we will continue to focus on executing our strategic priority, driving operational excellence and delivering value for our shareholders.
Thank you for your attention, and I will now turn the call back over to the operator for the question-and-answer session.

Question and Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Luke Lemoine, Piper Sandler.

Luke Lemoine

Hey, good morning from Prelude and Stuart, say, morning Stewart, all the large operator market consolidation should really help you guys.
Hi, Secretary excited with your focus on safety relative to smaller peers. I know this doesn't kick up in a linear manner and there might be some pauses as operators kind of determine and sort out plans. But could you just speak to the change in the operator market structure and how this could benefit you probably know in the back part of the year?

Stuart Bodden

Sure. Thanks for the question, Luke. We do think it has helped us and will continue to help us because of our focus on as you said, maintaining equipment train crews on and on safety as well. So we do think it's going to help us. I think we're conscious that sometimes and when the E & P's consolidate one plus one doesn't equal two, it equals 1.7. And so sometimes that could be a negative. But what we're seeing right now and the conversations we're having with the largest players. We certainly think that's going to benefit us that we think that we'll get additional work in. We think that it will start to shake itself out as the year progresses.

Luke Lemoine

Okay. And then on your on share repurchases, I mean, Stuart, you kind of outlined what you did in 23 as far as paying down down debt and then you bought back about 10% of share so far. I think with the remaining authorization, you have a little over 20% of your market cap that's available. Could you just talk about what's on and a lot of free cash flow coming this year. Two, could you just talk about how aggressive you would like to be with that buyback I mean, I know you have the goal of returning at least 25% of free cash flow, which you exceeded that in 23. And I'm kind of guessing you'll probably exceed that this year as well.

Stuart Bodden

Again, thanks for the question, Luke. Certainly, we're committed to returning at least 25% of cash flow at a minimum back to shareholders. I think what we saw in 23 and I think we'll take the same stance in 24 was as the stock price came under pressure, we felt like it was a great buying opportunity. So our intention is to kind of take that same stance as we go forward. Again, I think that we do want to grow the Company when we want to preserve capital to be able to do that. But we know that anything we do have to compete with our own shares. And what we saw was the value of our own shares was incredibly attractive with no integration risk. And so so again, I think going forward, you could expect us to take a pretty similar stance that if we see an opportunity we'll get pretty aggressive and the Board is very supportive of that stance as well.

Luke Lemoine

Okay. Thanks, lunch.

Stuart Bodden

Thanks, Luke.

Operator

Don Crist, Johnson Rice.

Don Crist

Morning, um, today I wanted to ask a question on pricing. You know, the power per hour rate on the workover rigs and the per se on the wireline really kind of surprised me this quarter. Is there anything there? Is it more bundling or just just not chasing kind of unprofitable work and your average came up is can you any details there.

Stuart Bodden

It's mainly the latter. It's maybe that you're not not chasing unprofitable work. I think that that's the first part I'd highlight. And then I would say that there is some bundling, meaning more ancillary equipment going out with some of the rigs, which tends to increase kind of the revenue again, the overall average revenue per hour.

Mellisa Cougle

Yes. The other thing Dan can probably call attention to a when you look at, I think Stuart's comments of finance really strongly to high-spec rigs. One of the dynamics we had in wireline, although challenged as far as the quarter, there were a few jobs that were really productive jobs. So overall activity depressed the jobs. We have a really, really productive job, which I think kind of drove that stage count pricing up. I think you'll probably see that as Powercom. That's probably not going to stay there in the first quarter. We'll see how the year shakes out as kind of frac frac crews kind of go back to work in the coming months. But I think that it will you'll see that fall off here in the first quarter from us from a wireline pricing perspective, I think.

Don Crist

Okay. And just two quick modeling questions for me on CapEx this year, I'm assuming with kind of flat activity CapEx will come down a little bit from last year and a little bit.

Stuart Bodden

We have suggested last year we were putting a little bit of dollars behind that in customer contracts. There's still a few of those are kind of falling through. So I think we think of it mostly as a flattish year as much of a pullback here, but sort of remains to be seen, I think as we get into the year.

Don Crist

Fair enough, yes. And I'm assuming that the second and third quarters would be the highest growth quarters and highest EBITDA quarters with the first a little bit light in the fourth time in the middle. Is that the right way to think about it as well that?

Stuart Bodden

Yes, we were saying, yes, exactly Gary, I appreciate it.

Don Crist

I'll turn it back.

Stuart Bodden

We're I think, done here.

Operator

Derek Podhaizer, Barclays.

Derek Podhaizer

And maybe just sticking on the wireline theme, can you talk about maybe the interplay between the different services under that, Brad and I know you have the completions focus work, production focus work and then the pumpdown work. I know there's different margin profiles and did that affect some of the first stage pricing that we're seeing, but just thinking about it more from those different verticals under wireline Yes, thanks for the question there.

Stuart Bodden

On the first stage pricing that that really is just tied specifically to the plug-and-perf business or the completions business. So it's not really impacted by either the pump down or that were the production side?
I think as we've kind of talked about in the past, on the completion side, it's been a pretty challenging market. It remains pretty challenging. There are some, I'd say, some kind of deals being shopped that might potentially help on the consolidation side.
We'll see if they come to fruition or not.
But again, I think on a plane per side, we've seen the market remain pretty challenged and interest with some of the E&P operators are kind of hitting a lot of that work to see if they can lock in lower prices. And as again, as we've said, as a result, we've really been kind of focusing our attention more on the more resilient through-cycle production-type work on the wireline side, and it's probably worth mentioning.

Mellisa Cougle

We have recently been in the past about shifting that PerkinElmer, I think we saw in the fourth quarter and with continuing, and we've talked about previously, Stuart made a comment about the North region. Remembering the North region really is a bigger business and it has a really outsized sort of weather impact. So they start to see significant decline in November, and it doesn't really start to pick back up until late March. We see that phenomenon again this year. And so we do feel strongly we are going to be pursuing the pivot. I think that's that much more difficult to do with the middle of winter. So I think you actually have an outsized effect, if you will, because you had sort of said we're not chasing the unproductive completions were and as we're trying to sort of pivot over to production and pump now we're kind of doing it as it will in a couple of months, sort of started that before we really start to see some winter. So we're optimistic this year. It'll probably take a little bit to get off the ground lease.

Derek Podhaizer

Is it fair to say we probably expect depressed results off of wireline again in Q1? I think we really are expecting some pickup here in your reserve resource. I mean, on the margin profile, obviously, it's bounced around quite a bit over the last few years. I mean, is there do you have a gauge on what you think kind of through cycle margins can look like for this business? I mean, I know there's just been a lot of volatility, but as far as the cost, adjusting the cost structure, addressing the right mix of work under the wireline brand, just in order to help us gauge what are we how we should think about margin profile over the next couple of years for wireline.

Stuart Bodden

So that's how we think about it internally, Gerrick, is certainly we think that's kind of a north of 15% business is what it ought to be. And that's kind of how we're modeling it kind of through cycle.

Mellisa Cougle

Obviously, a little bit of work to do still to get there, but that's how we're thinking about and naturally avoiding a I know we primarily talk off line and production and pump down is closer to 20 completions are arguably right now. So the other wildcard in that mix is completion is the arguably 10 or in someone plus, but when you get high productive jobs, you can you can donate 10% even in completions. We're just not seeing that lately given the market dynamics. But I think to your point, our approach for kids to kind of get continuously above 10 every month and then when they will be stretching as we get more and more of our footing and our foundation set on the production business, I think you'll see that it might take us a couple of years but I think you'll see them start to get more resilience and Tito here.

Derek Podhaizer

Just helpful. Just a final one for me. Yes, the outlook for 2024 seems to be softening quite a bit, primarily driven from the weakness in the natural gas basins. But any initial high level takes on how we should think about top line 2024 and EBITDA and just where you guys are thinking right now?

Stuart Bodden

I think we're thinking about a pretty similar year, Vishal or 24 being a pretty similar year in total to 23, as I said in my earlier remarks, Q1 kind of got off to a slow start, but we do have some things in place and we're kind of optimistic optimistic on how things will kind of come together in the back half of the year. So like So again, I mean, I think kind of year over year, Phil's point portal is pretty similar to 23.

Mellisa Cougle

But again, Q1 is going to be cause a bit of a slow start as part of that is probably also worth worth it to mention this year but Brinker has been able to do in pullback times. We felt the last time we saw that in 2021, we pulled off three acquisitions. So I think that that's getting to be higher on our radar screen as well this year.
And so we'll see anybody's guess, but I think that's something that certainly our radar screen as well.

Derek Podhaizer

Scott, thanks for the color, and I'll turn it back.

Stuart Bodden

Appreciate it.

Operator

John Daniel, Daniel Energy Partners.

John Daniel

Please go ahead with more integrated motion.

Stuart Bodden

Are you Ira?

John Daniel

Well, I guess my first question is how would you characterize seller expectations today? Just kind of given natural gas weakness, fears of more E&P consolidation and the impact on the business have you seen a change today versus maybe a year ago?

Stuart Bodden

I think we've definitely seen a change. We're taking more inbounds than we have in the past. I think we feel like the bid-ask is narrowing. I'm not sure it's all the way there yet, but it does feel like it's starting to narrow.

John Daniel

Okay. And then when you I thought the comp commentary in the release and on the prepared remarks was helpful. But as you look at the difference between smaller bolt-ons versus larger deals, it would be again, very general question, but how would you say there's more realistic in their expectations? And if you could just opine on that, that makes any sense.

Stuart Bodden

Yes. I think what I would say is we're probably more focused on the bigger transactions than the smaller one. And part of that, John, is that I think on the smaller ones, unless it's really tied to a specific region that we're not in price. So it's a geographic expansion or perhaps they have a technology or a sort of a defensible position. I think those are interesting to us. But in general, a lot of the smaller players. We feel like we have equipment and a lot of the smaller players don't really give us a lot because I think we feel like with some of the bigger ones, we can really continue that consolidation theme that we've been pursuing.

John Daniel

So I think we're more focused on the bigger ones they got married up and then the last one for me is just on coil tubing. I know it's not the big biggest of your businesses, but just your thoughts on what you're seeing there. And then just as laterals are getting longer and the Permian is sort of separately any difference in demand for stick pipe versus coil?
I know some thoughts would be helpful on the operation of sort of on the first on the coil.

Stuart Bodden

And again, the core business for us is in the Rockies. I think what we are seeing is that even there with the longer laterals we're seeing demand for we have, again for more capable equipment. So we are we are seeing we are starting to see that and we do have some investments other planned for the year to satisfy that demand. I think if you look at on the drill-out space for us in 23, even with the slowdown in frac, that kind of happened through the year are 24 hours space where our drill-out space was very, very consistent through the year. So I it's I wouldn't say it's a huge shift. But again, I think we're seeing demand hold up pretty well is a little slower in January, but we're kind of back off the risk on that.
We are included in that.

John Daniel

Appreciate it.

Operator

William Kim, Presidio Asset Management.

William Kim

Is to administer to impress that. I guess they looks great that arrangers and again, financial position to be able to repurchase shares being that three compares to your competitors, I think your shares have been reflecting that versus versus the other guys.
My question relates more to the shareholder dynamics today. I know that your largest shareholder has distributed shares to their limited partners partially, but I know there's also a large chunk left. Do you have any color on what nice strategy may be in the coming year?

Stuart Bodden

Sure. Thanks for the question, Wim. I know in the distribution that happened in the fall that was related to India funds. So our shares were in two separate funds for that share or for CSL and the first fund timed out. And so that's why those shares were distributed to LPs. Beyond that, we don't have a lot of clarity on Fund two. We do know that CSL has been very supportive of the business constructively the business. So we don't anticipate any near term. But truthfully, I don't think we know for certain.

William Kim

But again, Dave, they've been very supportive and constructive, but it would you do you think that there would be maybe an opportunity to repurchase a large chunk of those shares? Or is that kind of not not in discussion stable?

Mellisa Cougle

Yes. I mean, I guess I'll take a stab at that and say our best understanding right now is those are not available to be purchased. And one thing Stuart did mention is that there was some selling on the back of the distribution of online and we understood that we had some small rebalancing so that it's not our understanding at this point that those shares are available and they are interested in actually getting the market. I think if we were to become aware that there was there was a distribution plan or there was a need to sell further you get away with.
Yes. But at the time of our board members is increasingly aware of our desire to repurchase up to or we have very active dialogue around that. So we would be very interested in engaging in that depression as best we know now those shares are not coming out.

William Kim

Thank you so much and keep up the great work.

Stuart Bodden

Great. Thanks, really appreciate it.

Operator

Concludes our question and answer session. I would like to turn the conference back over to Stephen Stuart Boden for any closing remarks.

Stuart Bodden

Thanks, Andrea, and thanks, everybody, for joining the call and thanks for your interest in Ranger very much appreciated, and everyone has a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.